What is the test for a ‘one man company’?

Singularis Holdings Ltd (In Official Liquidation) (A Company Incorporated in the Cayman Islands) (Respondent) v Daiwa Capital Markets Europe Ltd (Appellant) concerns whether the dishonest state of mind of the sole shareholder and a director of a company is attributable to the company for the purposes of a claim in negligence against a third party bank or broker and, if so, what the consequences are of that attribution. The appeal was heard by Lady Hale, Lord Reed, Lord Lloyd-Jones, Lord Sales and Lord Thomas last month. The appeal in relation to attribution raises the following questions (1) what is the test for a “one man company”? is it a company where every single shareholder and director is implicated in the fraud, irrespective of whether the directors were involved in the management of the company at any point in time; or a company that is wholly owned and controlled by a fraudulent sole shareholder and dominant director and/or by the only person involved in the management and ownership of the company? (2) upon whom does the burden of proof lie so far as the role of the other directors is concerned? does it lie upon the company on whose behalf the directors acted at the material time or upon the bank or broker? (3) in determining the question of attributionIs it relevant to consider whether the company had a legitimate business, and/or does the nature of the Quincecare duty lead to the conclusion that Mr Al Sanea’s fraudulent knowledge should not be attributed to the respondent? If Mr Al Sanea’s knowledge and fraudulent actions are attributable to the Respondent then the appeal raises a series of further questions.

These questions are (1) is the respondent’s claim defeated by lack of causation because the Quincecare duty does not extend to protecting the respondent from its own deliberate wrongdoing and/or because the respondent did not rely upon due performance of the Quincecare duty? (2) does the reasoning of Evans-Lombe J in Barings plc v Coopers & Lybrand (a firm) [2003] PNLR 34 apply where the respondent is primarily (as opposed to vicariously) liable for the actions of Mr Al Sanea? (3) how does the three stage test recently identified by the Supreme Court in Patel v Mirza [2016] 3 WLR 399 apply in this case? In particular: is the respondent’s claim contrary to public policy? does the existence of money laundering legislation and associated regulations provide a countervailing policy consideration in favour of allowing such a claim? would it be disproportionate to deny the claim because of the ability to make a deduction for contributory negligence on account of the respondent’s own contributory fault? The facts are that the appellant is the London subsidiary of a Japanese investment bank and brokerage firm. At the material time, the respondent was wholly owned by an individual called Maan Al Sanea (“Mr Al Sanea”), who was the company’s Chairman, President, Director and Treasurer.

Supreme Court: Corporate Raids and the Proper Purpose Rule

Eclairs Group Ltd and Glengary Overseas Ltd v JKX Oil & Gas plc [2015] UKSC 71 (2 December 2015)

In a judgment which may at first blush appear to be unremarkable, Lord Neuberger, Lord Mance, Lord Clarke, Lord Sumption and Lord Hodge held that the proper purpose rule applied to the exercise of the power conferred on the board – allowing it to issue a “restriction notice” whenever a statutory disclosure notice had been issued and had not been complied with – under article 42 of JKX’s articles of association and that the company’s directors acted for an improper purpose. Notably, section 793 of the Companies Act 2006 provides a public company the power to issue a statutory disclosure notice to any person whom it knows or reasonably believes to be interested in its shares. According to the Supreme Court, in circumstances where a company’s board of directors was entitled under the company’s articles of association to issue a disclosure notice against a shareholder and where the board was further entitled – in the event that they knew or had reasonable cause to believe that the statements given in response were incorrect – to restrict the shareholder’s right to attend or vote at any general meeting of the company, any such restriction would be invalid if the board’s purpose in making the restriction had been to prevent the shareholder voting at the meeting.

Lord Sumption gave the main judgment and Lord Hodge agreed with him. Lord Mance and Lord Neuberger agreed that the appeals should be allowed, but they preferred to not to express a view on aspects of the reasoning. Moreover, Lord Clarke agreed, but expressed a preference to defer a final conclusion on those aspects until they arise for decision and have been fully argued. Prior to this decision, the case had been reported in the Court of Appeal as [2014] Bus LR 835 and in the High Court as [2014] Bus LR 18. JKX Oil & Gas Plc, an English company listed on the London Stock Exchange, was the parent company of a group involved the development and exploitation of oil and gas reserves, primarily in Russia and the Ukraine. From that perspective, Lord Sumption used the opportunity to apply his unrivalled expertise on both company law and Russia to the present case. The exercise of a discretionary power by directors tends to be challenged on the ground that it does not promote the success of the company, a subjective question as regards the company’s business interests.